The Conduct of Independent Contractors May Result in Liability in Racial Discrimination Claims
Cameron Baker, Associate Attorney
A recent decision by the Court of Appeals for the Tenth Circuit, Cruz v. Farmers Insurance Exchange,[1] presents a cautionary tale for businesses who use independent contractors to investigate workplace conflicts. As the court noted, racially-charged statements can be imputed under traditional agency principles and create unanticipated liability issues.
Cruz v. Farmers Insurance Exchange – Background
Last year, Michael Cruz sued several insurance companies (collectively “Farmers”), alleging they terminated his agency contract on the basis of race, in violation of 42 U.S.C. § 1981. Cruz, a Hispanic man of Mexican-American heritage, had worked as an insurance agent and sold Farmers insurance policies for over thirty years pursuant to an Agency Appointment Agreement.
A disgruntled customer complained about his treatment by Cruz to a senior Farmers executive via LinkedIn. The executive referred the complaint down to Cruz’s District Manager, Mr. Clint Sales. Like Cruz, Mr. Sales was classified as an independent contractor of Farmers. Based on Mr. Sales’ and other parties’ investigations into the incident, Farmers opted to terminate Mr. Cruz’s contract.
The Lawsuit
Cruz subsequently sued Farmers, alleging that his agency contract was terminated due to race in violation of Section 1981. Cruz relied on a statement made by Mr. Sales during the investigation as direct evidence that the company racially discriminated against him. Specifically, Mr. Sales allegedly told Cruz’s wife that Farmers was considering cancelling Cruz’s agency agreement because Farmers did not want a “crazy brown man running around with a gun.”
When Farmers moved for summary judgment on the Section 1981 claim, Cruz attempted to introduce Mr. Sales’ statements as direct evidence of discrimination. The court ruled the statement was inadmissible hearsay because Mr. Sales was an independent contractor, rather than an employee of Farmers, and Mr. Sales otherwise did not have the ultimate authority to cancel Cruz’s contract.
The Court of Appeals reversed the lower court’s decision, finding that the statement was not hearsay “as a party-opponent admission[2] made by an agent within the scope of the agency relationship.” The Court of Appeals reasoned that Mr. Sales made the statement while actively investigating Cruz at the direction of Farmers. Because Mr. Sales was acting on behalf of Farmers as Farmers’ agent at the time of the statement, the Court rejected Farmers’ argument that Mr. Sales’ independent contractor status, standing alone, precluded imputing Mr. Sales’ comments to Farmers. Rather, applying traditional agency principles, the Court of Appeals found that Mr. Sales acted as both an agent and an independent contractor, and acted within the scope of his agency when he made the alleged statements at issue.[3] The Court of Appeals concluded that the “brown man” statements constituted admissible evidence of direct discrimination, and reversed the lower court’s entry of summary judgment in favor of Farmers.
Key Takeaways
The Cruz decision is a good reminder that if a business tasks an independent contractor with investigating workplace issues and misconduct, it cannot hide behind the investigator’s “independent contractor” status when the investigator commits acts or makes statements which may be discriminatory while conducting the investigation. In other words, once an agency relationship is established, the business must contend with the ramifications of the agent’s conduct – good or bad.
[1]--- F.4th ----, 2022 WL 3051064 (10th Cir. 2022).
[2] Federal Rule of Evidence 801(d)(2)(D).
[3] Cruz v. Farmers Ins. Exch., 2022 WL 3051064, at *4-6.